Bank of Korea to keep policy easy in 2017, sees output gap persisting

SEOUL, Dec 29 (Reuters) - South Korea's central bank said on Thursday it plans to keep its monetary policy accommodative next year to support economic recovery and to push inflation to reach the bank's target of 2 percent.

In its annual plans for policy direction, the Bank of Korea (BOK) said it sees the output gap persisting through next year as the economy will lack the momentum to reach full capacity. The output gap measures an economy's actual output versus its potential output.

The BOK said there was a limit to how far monetary policy alone could go towards achieving financial stability, arguing that macro-prudential policies should be used in harmony with monetary measures to curb imbalances.

Growth in consumption and construction investment was seen slowing next year, while capital investment and exports were likely to rebound, the Bank of Korea said.

The economy, it added, faced downside risks from political uncertainty, referring in particular to ongoing investigations into an influence-peddling scandal involving President Park Geun-hye, who faces losing her position.

Meanwhile, household borrowing will likely keep rising at a faster pace compared to the average speed of previous years, although it will not surge sharply, it added.

Inflation would continue heading towards the central bank's target, while fluctuations in global oil prices and foreign exchange rates made for uncertainty over the likely path of prices.

On exchange rate volatility, the BOK said it would seek measures to ease temporary shocks in financial markets if they occurred unexpectedly. It did not offer further details on the measures. (Reporting by Christine Kim; Editing by Eric Meijer)